Small business rates fair - ANZ

 The lending giant has returned fire on behalf of the industry amid claims that the banks are gouging the small business sector in their battle to recoup higher funding costs. 

Small businesses were more likely than mortgage customers to default on their loans and banks were generally able to recover less when small business clients defaulted, ANZ said.

"Interest rates set by the banks must take account of the risk of lending money," the group said, in its submission yesterday to the Senate inquiry into competition in the banking sector.

Hearings in the high-profile inquiry are scheduled to begin next week.

Political anger over borrowing costs for small businesses has mounted following the publication of data by the Reserve Bank last week that laid the problem bare.

While the debate on credit costs has broadly centred on mortgages, the data revealed that the increase in home loan interest rates had broadly traced the increase in the cost of the banks' funding.

Mortgage rates, relative to the Reserve's official interest rate, have climbed about 1.2 percentage points since the onset of the global financial crisis.

But costs for small business loans have accelerated dramatically, blowing out by 2.2 percentage points despite the fact that they are generally secured against houses, like mortgages.

ANZ said yesterday that in its small business division, the delinquency rate - the proportion of loan payments overdue by at least 90 days - had "more than doubled" since 2007.

Banks had to hold more cash for the lending they made to small businesses, "given the higher probability of default and loss", the bank said.

"A requirement to hold three times as much capital for small business customers than residential mortgage customers is typical and is required by (the banking watchdog)."

ANZ also warned that some competition in the sector before the financial crisis came from "players whose business models were not sustainable". It signalled that if the Federal Government moved to effectively hamper profitability of the banking industry, "then investors' appetite for that sector will diminish".

Banks' credit ratings might be affected, which would push up the amount they paid for funding - "a cost that would necessarily be passed ... to customers".